FEARS THAT the credit crisis may yet have some way to run have knocked bank stocks of their perch as the biggest industry group in the SP 500.
US financials have lost 13 per cent of their value this year, almost four times as great as the loss suffered by the SP as a whole. Having already tumbled by 21 per cent in 2007 - the sector's worst year since 1990 - banks must now be content to play second fiddle to the technology sector, which took over the mantle that had been held by the financial sector since February 2002.
A number of big names have warned that turbulence is likely to continue. Oppenheimer analyst Meredith Whitney's grim forecast that the credit crisis was likely to go into 2009 and "perhaps beyond" shook markets on Tuesday. "The real harrowing days of the credit crisis are still in front of us and will prove more widespread . . . than anything yet seen," Ms Whitney said. She expects banks will need to raise another $170 billion to compensate for growing loan losses.
Ms Whitney has earned herself a reputation as a market-mover, thanks in part to a streak of prescient calls over the last year. One of the first analysts to appreciate the severity of the issues facing the financial sector, she correctly predicted that sub-prime write-downs would force Citigroup to cut its dividend last October.
The Oppenheimer team are one of the most bearish on Wall Street - Ms Whitney's profit estimates for US banks are 72 per cent and 37 per cent below consensus forecasts. Yesterday, Merrill Lynch adapted a similarly bearish tone, cutting Lehman Brothers' estimates by 93 per cent.
Warren Buffett doesn't get into the game of earnings estimates but the billionaire investor this week agreed that "the losses aren't over by a long shot". He expects "rippling secondary, tertiary effects", saying that while the "Wall Street crisis is mostly over", he doesn't think "we are half way or even a quarter of the way through the impact in the general economy. The initial effects are felt by people who did the silliest things, but the ripple effect is felt by people who might have done quite sound things."
George Soros said that while the "acute phase" of the credit crisis is over, financial institutions have been "severely damaged" and it is now time to "feel the effects". Speaking to BBC Radio, Mr Soros said that Britain's housing bubble "has been greater" than America's and that the citizens of both countries would "almost inevitably" experience a recession. He predicted the US recession to be "more severe" than people expect.
Mr Soros's bearish feelings caused him to come out of retirement last summer and begin trading for the first time since 2000.
Further evidence of an "ongoing, very significant correction", to quote ECB President Jean-Claude Trichet, was offered up by insurance giant AIG, who announced on Tuesday that it expects to raise $20 billion to protect its balance sheet. That's 60 per cent more than originally planned, with beleaguered CEO Martin Sullivan saying that it left the company "well positioned for any continued volatility in the credit markets". Markets took this to be a euphemism for further write-downs and drove the shares to their lowest level in 10 years.
